The financial system allows traders to solve financing and risk management problems. In a well-functioning financial system: If the assets or contracts needed to solve these problems are available to trade, the financial system has complete markets. If the costs of arranging these trades are low, the financial system is operationally efficient. If the prices of the…
Trading Sessions Markets are organised as call markets or as continuous trading markets. In a call market, trades can be arranged only when the market is called at a particular time and place. In contrast in a continuous trading market, trades can be arranged and executed anytime the market is open. Execution Mechanisms The three main types…
When issuers first sell their securities to investors, practitioners say that the trades take place in the primary markets. An issuer makes an initial public offering (IPO)—sometimes called a placing—of a security issue when it sells the security to the public for the first time. A seasoned security is a security that an issuer has already issued. If…
Validity instructions indicate when an order may be filled. The most common validity instruction is the day order. A day order is good for the day on which it is submitted. If it has not been filled by the close of business, the order expires unfilled. Good-till-concelled orders (GTC) are just that. In practice, most brokers…
Buyers and sellers communicate with the brokers, exchanges, and dealers that arrange their trades by issuing orders. All orders specify what instrument to trade, how much to trade, and whether to buy or sell. Most orders also have other instructions attached to them. These additional instructions may include execution instructions, validity instructions, and clearing instructions. Execution…
The borrowed money is called the margin loan, and they are said to buy on margin. The interest rate that the buyers pay for their margin loan is called the call money rate. The initial margin requirement is the minimum fraction of the purchase price that must be trader’s equity. The relation between risk and…
People generally solve their financial and risk management problems by taking positions in various assets or contracts. A position in an asset is the quantity of the instrument that an entity owes or owns. A portfolio consists of a set of positions. People have long positions when they own assets or contracts. People have short…
Clearinghouses arrange for final settlement of trades. Summary By facilitating transactions among buyers and sellers, financial intermediaries provide services essential to a well-functioning financial system. They facilitate transactions the following ways:
The process of buying assets, placing them in a pool, and then selling securities that represent ownership of the pool is called securitisation. The corporation or trust is called a special purpose vehicle (SPV) or, alternatively, a special purpose entity (SPE). Depository Institutions and Other Financial Corporations Depository institutions include commercial banks, savings and loan…
Financial intermediaries help entities achieve their financial goals. These intermediaries include commercial, mortgage, and investment banks; credit unions, credit card companies, and various other finance corporations; brokers and exchanges; dealers and arbitrageurs; clearinghouses and depositories; mutual funds and hedge funds; and insurance companies. The services and products that financial intermediaries provide allow their clients to…